Next Economy Banking – Part I

You are building a business for the next economy – why would you want to spend some of your valuable time moving your money from the large bank you deal with now to a small, local bank or credit union? The CEO of Bank of New York Mellon gives a hint when he suggests that our “gigantic economy” needs gigantic banks. You already know that this gigantic economy does not make sense – it’s choking the very life out of our planet. A small, local economy that serves all life is best supported by small, local financial institutions. This blog post looks at why. In future posts, we’ll take a look at the challenges we face when we want to move our money and how local financial institutions are addressing those challenges.

At the end of 2011, there were 7,357 financial institutions insured by the FDIC holding $13 trillion in assets. The top 10 banks held almost 80% of those assets. The top 4 banks – JP Morgan Chase, Bank of America, Citigroup, and Wells Fargo Bank – held over half. That is a lot of financial leverage for such few companies! If one of these banks makes a risky bet and gets into financial trouble, the whole economy might be at risk – just as happened in 2008. Despite Congressional attempts to prevent a similar melt-down, not much has changed, in part because the Congress has enacted legislation with few consequences and avoided laws addressing the size of banks. Three of the Big Four are heavily exposed to derivatives, the financial bets that were behind the Great Recession that started in 2008. In fact, JP Morgan Chase had a $2 billion loss on one trade in early May, indicative of business as usual at the Big Banks.

The big financial institutions also don’t seem to have the best interest of their customers in mind, as Goldman Sachs’ involvement in the Greek economy suggests (Goldman is the fifth largest financial institution in the US). Their own profit comes above the stability of, well, the world economy again, given that the situation in Greece has international implications.

Another broader reason is the structure of those smaller local institutions themselves: They are part of the next economy. Credit unions can be customer owned, non-profit entities. Many of the smaller banks are part of a world-wide association that emphasizes values – and they don’t mean shareholder value.

If the stability of the world economy or the business structure are too abstract for you, there are also more tangible reasons to switch to small, local financial institutions. Those institutions tend to be directly involved with local businesses, knowing the people involved in person. While this might not necessarily make them less risky, it is more likely that you can get a loan from them. They also lend more to small businesses. Although the total income that the Big Four earned from fees and service charges is comparable to that of two small Bay Area financial institutions (LIFT research), the annual report of Wells Fargo, for example, does not list supporting small businesses as “key drivers” to their performance. Instead it’s lower cost and more fees (page 32).

If you are convinced that it makes sense for a next economy business to bank with a local bank or credit union, you might still have concerns. Maybe you wonder if your money will be as safe there because smaller institutions might not do as much fraud screening as the Big Banks. Or maybe you simply are worried about the time involved with making the switch. We will take a closer look at those concerns in our next post, so please post your questions in the comments section below. If you are not convinced yet, please tell us why and we’ll see if we can come up with a response.

This post is part of a series. Part II discusses the challenges we face moving our money and part III points to some help for facing those challenges.

3 Responses to "Next Economy Banking – Part I"

Nice article. Have you thought of the feasibility of a consumer-run insurance program? If you get the chance, check out my last article. It’s about the transition of the Occupy Wall Street movement from street protests to actionable ideas through the work groups and similar organizational processes. I’d appreciate any comments, also. Keep up the good work.

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